Home Depot, Lowe’s should top sales estimates despite slowdown in July: UBS

Data from UBS points to a slowdown in same-store sales for home improvement companies Home Depot and Lowe’s, following strong activity in May and June, although the firm’s estimates are still higher than consensus. Home Depot is expected to report quarterly results on Tuesday, August 18, while rival Lowe’s is set to release its Q2 report the following day.

Video Transcript

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MYLES UDLAND: All right. Time now for our "Call of the Day." Today we are talking about UBS's latest note on shares of Home Depot and Lowe's. The firm taking a look at real time estimates. They call it their macro to micro now casting. Essentially saying what does the macro environment say about the fates of these two home improvement retailers. And while the firm still believes both companies are trending above estimates right now, they do see a bit of a softer environment in July.

And Seana, on the eve of the jobs report, where we expect to see an improvement, but a significantly slower rate of improvement in the labor market, seeing spending moderate at a company like a Home Depot or a Lowe's is certainly in line with this idea of a trough in the economy or stalling, I should say. Trough's not the right word. A stalling of economic progress as we got into the heart of the summer here.

SEANA SMITH: Yeah, Myles, and I think that this is what we have been talking about here on the program for the last several weeks. Because when you take a look at the real time data, the real time economic data that we have been getting out, it has been showing that we did see a little bit of stalling. I don't know if we necessarily saw a pullback. It might be too early to say that. But I think the data did stall. We saw a pretty robust recovery at the end of May into June. July, things started to fizzle out a little bit.

And UBS in this note, I think rightfully so, points out the fact that their slowdown, it coincides with the large breakouts that we saw throughout many states across the country. And it's interesting what we're going to see, I think, in the second half of the year. Because this is backward looking data, and I think this has been expected. It might show up in that jobs report tomorrow. I think the expectation that we could see a little bit of a pullback in the pace of hiring is largely forecasted here amongst many economists.

But going forward, it's interesting that UBS still maintains a buy rating on these two stocks. Because Lowe's and Home Depot have been two out-performers here, especially in the midst of the coronavirus pandemic. I mean, we have talked about time and time again on this program and other shows on Yahoo Finance, that Home Depot and Lowe's, as soon as those stores were allowed to reopen in many states across the country, their parking lots were full.

And that's because the pandemic has had, has caused people to shift their spending behavior. People are not eating out. People are not spending as much time outside of their homes. So what are they doing? They're noticing that they need to, they have some self improve, or home improvement products that they can work on. So they're spending their money at Home Depot and at Lowe's in order to do that.

So I think going forward, it's going to be interesting to see whether or not these two stocks can maintain some of the momentum that we have seen over the last couple of months. Because I think you could make the argument that, hey, maybe the people that would do these home improvement projects, they have been done. They have made their purchases, so maybe it's time that these two stocks take a little bit of a breather. But again, UBS still maintaining the two buy ratings these names. So it will be interesting to see the spending trends amongst consumers, particularly with these two companies here going forward in the second half of the year.

MELODY HAHM: I think it's also important to mention that margins are the most buoyed when it comes to the pro side of things. So for the people who are working on bigger projects who have ongoing needs, it's not just a one-off installation or fixing a leaky faucet. It's sort of the bigger landscaping projects and bigger renovations that had been put on pause whether contractors wanted to or not, for the last couple of months.

So we did see, I think, a 7.5% quarter over quarter increase in Q1. I'm curious to see in the earnings report at the end of August or mid August, what those numbers will look like, just based on whether that pent up demand will return from the bigger side of things. And then another piece of news out of Home Depot. They are, they did announce a couple of new distribution centers to replenish some store inventory. I think one in the Southeast and another will focus specifically on same day and next day delivery ala Amazon, Walmart, all of the ways that we expect to get our purchases.

So again, one of the reasons that people were so bullish on Home Depot and Lowe's in the first place, was that they seemed Amazon-proof. That was the narrative that had been first laid out. There was some debate around that. But I do feel as they continue to invest in their own supply chain, in their own ability to deliver to customers sooner, quicker, and with the click of a button, there is obviously a stronger argument to be made that they can withstand a lot of those macro pressures.

DAN ROBERTS: Yeah, guys, I was going to re-emphasize Melody's point about separating between pros, that is, professionals who have been hired to work on projects, they're going to Home Depot to stock up on supplies, and I guess the regulars, like us. So we're imagining how many people are doing home improvement projects right now versus how many of these are professionals who are picking up things.

And also this UBS note, interestingly it says Google trends data suggested a slowdown in searches for Home Depot and Lowe's in July. Well, A, I never place that much stock in citing Google trends data. OK, fewer people googling it. That doesn't mean if they're not Googling, they're not doing projects. But also, there's a note to hear about the slowdown being more pronounced. The slowdown in retail sales for both, in states that have had a second wave. If we're not using the phrase second wave yet, then a re-spike or their first spike in cases. So of course. And so I think that's a lot of it here.

And let's remember, both companies still expected to beat the street with the next quarter. But Myles, I think where it'll get really interesting is to circle back to our ongoing, never-ending discussion now about moving out to the burbs. It's happening. Young people are moving out to the burbs. They're either buying their first home or buying their first home in the burbs. And then, will they begin those home improvement projects?

I don't expect Home Depot and Lowe's to see any huge slowdowns in that regard. Because if the trend is going to continue, and boy, what has the last two weeks been? More and more companies coming out and extending, some all the way to July 2021, the date when they're telling employees they are expected back in an office in New York. So I think the trend will continue. People are going to start house hunting, and that'll mean home improvement projects.

MYLES UDLAND: It's funny you mention that, Dan. A story we had a kill off for today's show, because we had to make room for guests, is story from Bloomberg. 57% decline in closings on New York City apartments. Certainly a trend there. And also that office reopening is something we haven't talked about that much. I'm curious why companies even give that date.

DAN ROBERTS: Right.

MYLES UDLAND: You might as well just say, indefinitely rather than 13 months from now. Because I just don't see a world where once you bring staff back, it's like, August 1, everyone arrives. It just doesn't. So why even put a date on it?

DAN ROBERTS: Right. Why put a date on it in both senses. Like, why say July. It could end up being later. But why say July now, when it could end up being safe, so to speak by March of 2021. So it is strange to me. And I think overall, what I'm hearing more of isn't, here's the new date you're expected back. But what I'm hearing more from friends who work at companies in New York City is, you don't have to come back if you don't want to, ever. You can now be a permanently remote worker. And that's why I think we're starting to see people consider the relocation that they'd always maybe hoped of, but thought, I'm chained to the city.

MYLES UDLAND: Yeah. And I guess as I was speaking, thinking, like this, we're thinking about it as employees, at the local HR issue. Everyone wants to know when we're going back. Really, they're publicly negotiating with their landlords. We might break our lease if we're not going to have X number of people back before this date. And as you could see, it was all over the press. So don't come back at me with a bunch of lawyers when I say we're not paying you.

DAN ROBERTS: Break our lease and head to Home Depot.